Howarth Dentistry Services operates in a large metropolitan area. Currently, Howarth has its own dental laboratory to produce porcelain and gold crowns. The unit costs to produce the crowns are as follows:

Porcelain Gold

Raw materials $ 125 $160

Direct Labour 35 35

Variable overhead 12 12

Fixed overhead 26 26

Total $198 $233

Fixed overhead is detailed as follows:

Salary (supervisor) $32,000

Depreciation 6,000

Rent (lab facility) 34,000

Overhead is applied on the basis of direct labour hours. These rates were computed by using 6,200 direct labour hours.

A local dental laboratory has offered to supply Hetrick all the crowns it needs. Its price is $190 for porcelain crowns and $205 for gold crowns; however, the offer is conditional on supplying both types of crownsit will not supply just one type for the price indicated. If the offer is accepted, the equipment used by Hetrick's laboratory would be scrapped (it is old and has no market value), and the lab facility would be closed. Hetrick uses 2,400 porcelain crowns and 650 gold crowns per year.

Required:

1. Should Howarth continue to make its own crowns, or should they be purchased from the external supplier? What is the dollar effect of purchasing?

2. What qualitative factors should Howarth consider in making this decision?

3. Suppose that the lab facility is owned rather than rented and that the $34,000 is depreciation rather than rent. What effect does this have on the analysis in Requirement 1?

4. Refer to the original data. Assume that the volume of crowns used is 4,200 porcelain and 650 gold. Should Howarth make or buy the crowns? Explain the outcome.